When to Begin?
The best time to start the Fool Four

by Ann Coleman

Reston, VA (March 31, 1999) -- "When should I start?" continues to be the most popular question in the Foolish Four world. The simple answers don't seem to really address everyone's concern adequately, so today I will try to answer that question in more depth.

But first a word about statistics. When I answer questions like this, my replies are based on what we have found when back-testing this strategy over the last several decades. Besides the fact that the future never duplicates the past, an answer based on statistics is going to be wrong fairly often when you apply it to specific situations. For example, when I tell people our model shows that portfolios renewing in January have the highest returns, that is true. The average annual return for portfolios renewing in January was higher than for portfolios starting in the next best month -- December.

It is also true that for single-year returns January 1990 was one of the worst months to start ever. Foolish Four portfolios starting then would have lost 17.6%. That was the absolute worst month to start of any month since 1973. Looking even further back, if you had started a Foolish Four portfolio in January of 1966, you would have lost 23%!

All I can tell you is what worked in the past over long time periods. The average returns won't tell you anything at all about how your portfolio will do this year or next year. At best, it's a best guess about a long-term future average and nothing more.

The fact that long-term portfolios renewing on the first trading day of January outperformed portfolios renewing on the first trading day of other months is, in itself, not very significant. After all, if you were to average twelve different batches of anything, one batch would have the highest average even if the factors that went into each batch were more-or-less randomly distributed.

What makes that finding important is the pattern that emerges. If the average returns were all over the place -- January 1, February 9, March 12, etc. -- and were also fairly close, then we would have assumed that it really didn't matter when you started. But what we found was a fairly smooth curve which drops, more-or-less steadily, from January to June/July then climbs, more-or-less steadily, back up to December. In fact if you extrapolate the curve, it appears to peak, not on January 2, but somewhere near the end of December.

That kind of curve says that something is at work here. We have also seen data from other Dow Dividend strategies that used the last trading day of the year rather than the first, and that data showed an average return for those strategies about 0.5% higher than our numbers showed for the same strategy. That fact, and the shape of the curve, is why I recommend that one should renew (not necessarily start) a Foolish Four portfolio in late December.

Over the long term, late December was the sweet spot. Whether it will continue to be, is anyone's guess, but until other data becomes available that either confirms or disputes this, it makes sense to renew your Foolish Four portfolio sometime around the winter solstice.

Does that mean you should wait until next December to start? Not at all. The average annual return for the worst month was still a respectable 15%. As long as you understand that that average return includes some losing years, and accept that possibility, there is no reason wait.

The question then becomes, how do I get onto a December renewal cycle? Again, speaking statistically, portfolios that are held for less than a year are more volatile and, when their returns are annualized, less profitable, than portfolios that are held for more than a year. So probably the best plan would be to start now and hold through the end of this year all the way to the end of 2000, at which point you switch to an annual renewal period.

If you are not investing in a tax-advantaged retirement account, that advice also has the advantage generating long-term capital gains rather than short term gains. If you are investing within the shelter of an IRA, then, tax-wise, it doesn't matter whether your renew this December or next. And, since my advice to hold until December 2000 is based on long-term average returns, it would be quite reasonable to change your mind this December. If you are happy with your returns at that point (or unhappy with them and just sick of those stocks!) and want to renew then, there's no reason I know of not to. There are limits to statistics. You get to pick.

Fool on and prosper!

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Today's Stock Lists | 1999 Dow Returns

03/31/99 Close
Stock  Change   Last
CAT  -1        45.94
JPM  -2  1/16  123.38
MMM  +   1/2   70.75
IP   -   7/16  42.19

                   Day   Month    Year   History
        FOOL-4   -1.07%   1.81%   2.84%   4.37%
        DJIA     -1.28%   5.15%   6.97%   6.55%
        S&P 500  -1.11%   3.88%   4.97%   5.22%
        NASDAQ   -0.75%   7.59%  12.27%  13.81%

    Rec'd   #  Security     In At       Now    Change

 12/24/98    9 JP Morgan    105.51    123.38    16.93%
 12/24/98   24 Caterpillar   43.08     45.94     6.63%
 12/24/98   22 Int'l Paper   43.55     42.19    -3.13%
 12/24/98   14 3M            73.57     70.75    -3.83%

    Rec'd   #  Security     In At     Value    Change

 12/24/98    9 JP Morgan    949.62   1110.38   $160.76
 12/24/98   24 Caterpillar 1034.00   1102.50    $68.50
 12/24/98   22 Int'l Paper  958.12    928.13   -$30.00
 12/24/98   14 3M          1030.00    990.50   -$39.50

              Dividends Received      $15.04
                             Cash     $28.26
                            TOTAL   $4174.80